Event

In South Asia and South-East Asia, many countries are being hit by their most intense Covid-19 waves since the pandemic outbreak. India is the Asian epicentre with more than 300,000 cases and 3,000 deaths a day. The whole country is hit by a Covid-19 tsunami. Based on alarming reports in several states and on extreme shortages of medical equipment (leading to emergency international aid), those official figures are probably highly underestimated. Several states including Maharashtra and capital Delhi have imposed strict local lockdowns. Local containment measures have also been re-introduced in many countries (and many capitals) in South and South-East Asia. Besides pronounced spikes in infections in the Philippines and Indonesia (and to a lower extent in Malaysia and Pakistan), surges in cases are more modest in other countries but nevertheless exceed the peaks of last year and have even appeared in countries such as Laos and Cambodia where Covid-19 cases were almost absent in 2020.

Impact

Although it recorded its first recession (-1%) in 60 years, emerging Asia’s economy was by far the world’s most resilient in 2020. This was due to a largely contained Covid-19 pandemic. But Covid-19 is also very resistant as mutant variants show and fighting it requires permanent caution. This is a bitter lesson for the Indian government. Indeed, only two months after PM Modi claimed victory on the infectious disease in last February, India has become the epicentre of the world’s most severe Covid-19 wave as daily infection and death rates report every day. To a much lower extent than in India, South Asian neighbouring countries, such as Bangladesh and Pakistan, also experience a marked surge in Covid-19 cases, which could rapidly increase in the coming weeks. This worrying evolution is also currently faced by many countries in South-East Asia – the Philippines and Indonesia being the most hit. As the virus was largely under control last year in those sub-regions, the intensity of the current second or third wave is probably explained by the various and more contagious virus variants and the potential fatigue towards containment rules (e.g. a recently crowded religious festival in India). The emergence of new variants has led countries to impose again local lockdowns at varying degrees. Moreover, this might motivate national authorities to accelerate the too slow vaccination plans. Except in Bhutan, in the Maldives and in Singapore, the average inoculation rate (of one dose) is indeed very low and lagging behind in Asia (below 4%). Explanations lie notably in supply issues and possibly in the past successful experience in controlling the virus. On a slightly more positive note, in mid-April, the inoculation rate reached 8% in India and 15% in China and could greatly increase in the months to come. Behind those two giant countries, Cambodia (7.7%) and Indonesia (4.3%) are showing the best vaccination progress. However, at the current pace and even considering rising supplies of Chinese and Russian vaccines, vaccinating the majority of the population could be a very long process and last until 2023 for many countries (e.g. Indonesia, Pakistan). As for Myanmar, vaccination is an extra concern amid a deep political and economic crisis. While data haven’t been reported since the February state coup, it is very likely that the chaotic situation has affected the testing and vaccination campaign.

These sharpest Covid-19 waves are occurring at a time of ongoing sustained recovery in the region. In emerging Asia, the 2021 real GDP growth outlook is strong (+8.5%) as economies are expected to continue on their recovery towards normalisation and pre-pandemic levels. Manufacturing exports (boosted by global and Chinese demands) and public spending will remain the main growth engines. The Covid-19 surge is nevertheless a risk to the economic outlook in South and South-East Asia particularly if containment measures are in place for a prolonged period and vaccination pace does not pick up significantly. In addition, disruption in global supply chains – especially the shortage of semiconductors – is likely to linger over the year whereas the tourism sector will continue to suffer as travel restrictions could be maintained for an extended period. The endless tourism crisis implies that economies more reliant on the sector such as the Maldives, Sri Lanka, Thailand and Malaysia could see a slower recovery. The same obviously applies to India’s overall economic activity. For other countries, the impact could be more limited. At this stage, good fundamentals in the region – with country disparities though – resilient remittances and foreign trade boost are likely to support the ongoing recovery and barely affect country risks. Looking ahead, in this uncertain economic and health context, and depending on the Covid-19 and vaccination evolution, economic forecasts could be somewhat revised downwards later this year. It will also be interesting to see to what extent the latest Covid-19 waves will have an impact on the countries’ fiscal and monetary policies. Upcoming weeks and months will tell what the socio-economic consequences will be for the two sub-regions. In the meantime, a certainty is about to emerge: the coronavirus toll in South and South-east Asia is likely to be more severe in 2021 than in 2020.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com

Event

On 15 April, the US tightened its sanctions on Russia. The following activities by a US financial institution are prohibited as of 14 June 2021, except to the extent provided by law or unless licensed or otherwise authorised by the US OFAC: (1) participation in the primary market for rouble or non-rouble denominated bonds issued after 14 June 2021 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation; and (2) lending in rouble or non-rouble denominated funds to the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.

As countermeasures, Russia expelled ten US diplomats, restricted the work of those remaining in Moscow and added US officials to its sanction lists.

Impact

The recent US sanctions targeting the issuance of sovereign debt should currently have a limited impact as it targets the primary market (where debt is issued) and not the secondary market. Indeed, Russia’s public finances are very strong with a public debt of about 20% of GDP in 2020. The overall fiscal deficit is forecasted to amount to less than 1% of GDP this year. Hence, the issuance of new sovereign debt should be rather limited this year and might thus be fulfilled by domestic institutions that would afterwards sell the bonds to other institutions in the secondary market. That being said, as long as the sanctions are in place, it implies that the flexibility of the Russian government to issue new sovereign debt on the international capital market would be more limited, which would somehow limit its flexibility.

Moreover, the tightening of the US sanctions is a clear warning that more sanctions might be imposed. This comes in a context of very low relations between Russia and the West. There are many contention points stemming from the conflict in Ukraine where tensions are again dangerously flaring up, cyberattacks (cf. the SolarWinds hack), interference in the recent US elections and the recent arrest of Alexei Navalny. On the positive side, Joe Biden has the intention to try to normalise the relations with Moscow, and has proposed to organise a summit with President Putin.

As long as the risk of a further tightening of sanctions persists, Credendo would maintain its short-term political risk in category 3/7. Given the vast foreign exchange reserves, low short-term external debt and the current account surplus, the classification is largely driven by the risk related to sanctions.

Analyst: Pascaline della Faille – P.dellaFaille@credendo.com

Event

Right-winger Guillermo Lasso surprisingly won Ecuador’s April presidential run-off. He ran against Arauz, a left-wing populist protégé of former president Rafael Correa. Arauz – who said he would renegotiate the vital IMF loan – clearly won the first round but Lasso was able to overcome his 13% deficit between the first and second round, and decisively won the run-off elections. Lasso will take office in May and is expected to continue incumbent president Moreno’s orthodox macroeconomic policies. Essentially, the IMF agreement that forms the basis for policymaking is expected to continue to be the linchpin of policymaking.

Impact

President Lasso will face a challenging 4-year presidential term. Last year, the country restructured its sovereign debt but despite fiscal consolidation efforts, a fiscal deficit of 2.4% of GDP is in the cards for 2021. As a result, public debt will be pushed to 65% of GDP at the end of 2021, a high level for the country. Hence, adherence to the IMF programme and fiscal consolidation will remain vital. Though Lasso seems committed to the IMF programme, his party is the smallest in Congress (holding 12 out of 137 seats). Left-wing and centre-left legislators dominate Congress, complicating alliances for his right-wing party. Furthermore, Lasso’s task will be made even more difficult in a country that is infamous for alliances falling apart almost as soon as they’ve been formed. Hence, governability and fiscal consolidation measures will prove to be challenging. Additionally, fiscal austerity at a time of increased hardship is very likely to be a source of unrest, especially in a polarised country such as Ecuador. In the past, such protests have already led to backtracking of fiscal consolidation and derailing of IMF programmes. Besides the public finances, tackling the Covid-19 pandemic will be another important task for Lasso. Despite high death rates due to the virus, Ecuador has inoculated barely 2% of its population, one of the lowest rates in Latin America. On top of that, a very contagious and possibly more deathly variant of the Covid-19 virus is currently raging through Latin America. The combination of low vaccination and a more contagious virus might lead to a prolonged pandemic and social unrest. Furthermore, it can hamper real GDP growth, which is forecasted at a modest 2.5% in 2021 after a deep contraction of 7.5% last year.

There is a positive outlook for both short-term and medium- to long-term political risk ratings if the country will be able to adhere to the IMF programme without triggering major unrest. That being said, uncertainties remain huge as many downside risks loom, such as volatile or lower oil prices (Ecuador is an oil exporter), natural disasters (e.g. the earthquake in 2016) and possibly difficult access to financial markets and capital outflows due to rising MLT interest rates in advanced economies.

Analyst: Jolyn Debuysscher – j.debuysscher@credendo.com

Global trade at a record high…

With the sudden stop of the economic activity worldwide, global trade reached last May levels that had last been hit at the beginning of the 2010s. However, it rebounded strongly in the third quarter of 2020 with the boom in e-commerce and thanks to a sustained demand from Europe and the US for medical equipment and electronics out of Asia. In the meantime, China was the first large economic power to resume industrial production. With those trends continuing, volumes of global merchandise trade have reached an all-time high (cf. graph 1).

… hides strain on supply chains

However, those thriving numbers are hiding shipping-related issues, which are currently putting a strain on global supply chains.

A global container shipping shortage is indeed at play since the rising demand for Chinese exports arose at a time when many container ships had been taken out of the market to sustain prices last spring. As a result, since last December, shipping freight rates have been multiplied by three at least on the routes between Asia and Europe or the USA (cf. graph 2). The shortage of seafarers as well as pandemic-related restrictions at ports are delaying the return of ships to Asia and adding to the hindrances and shortages. Last month, the behemoth container ship Ever Given blocking the Suez Canal, through which about 12% of global trade transits, was an additional (although temporary) obstacle, as many ships (container ships, tankers, etc.) were stuck for almost a week and others had to take the longer route through the Cape of Good Hope to transit between Asia and the West, thereby increasing freights. When the giant cargo ship was freed from the Suez Canal, it took several days before the hundreds of ships waiting to cross the Canal could resume their course, implying new delays and congestion at ports.

Regarding the outlook, slower-than-usual operations at ports due to Covid-19-related staffing issues could remain a hurdle with vaccination being particularly slow in the countries from which many seafarers and port workers come from.

Mounting freight rates imply higher commodity prices, from wood to polymers or textile. Textile plants in China have reportedly had to close due to those higher freight costs and delays. But supply chain problems are particularly acute in the semiconductor industry. Shipping issues combined with a huge rise in the demand for computers for homeworking, the February winter storm that hit Texas, paralysing some of the largest chip-making plants, and a fire last March at Renesas Electronics Corporation’s chip factory in northern Japan, one of the world’s largest chip makers for the automotive industry, are creating a huge shortage of those electronic parts, key to all digital devices. Moreover, the record drought and water crisis in Taiwan – a major chip manufacturer worldwide – could affect global chip production as well. The chip shortage has slowed automotive production around the world at a time when demand for the sector has rebounded and threatens to delay output for other forms of electronics, including smartphones. The issue could last at least until the second half of the year.

Analyst: Florence Thiéry – f.thiery@credendo.com

Introduction

The entire world has been turned upside down by the global Covid-19 pandemic, a crisis that is unique given that it did not start with a drop in demand or production. There were three aspects to tackle simultaneously: a collapse in demand, disruption to production and disruption to the supply chain. As a result, the annual global GDP fell by 3.3% in 2020 compared to 2019 (WEO April 2021) while world trade fell by 5% annually on average in 2020.

The sectorial impact of Covid-19 in Czech Republic, Slovakia, Poland and Germany in 2020

The impact of the crisis on the various sectors of these countries indicate both differences and similarities. For all four countries under review, namely the Czech Republic, Poland, Slovakia and Germany, the automotive sector was hit hard, although there are significant differences between countries. According to the European Automobile Manufacturers’ Association, average sales during 2020 in Germany and the Czech Republic were 19% lower than in 2019 (which was already lower than in 2018). In Poland and Slovakia, the drop was more significant (23% and 25% respectively), demonstrating that while production was mothballed, demand was also shut down, mainly due to the very strict lockdown and uncertainty around the development of the pandemic.

It goes without saying that another sector that has suffered greatly from the lockdown measures is tourism. According to data from Fitch Solutions, international tourist arrivals fell by 69% in Germany, 64% in the Czech Republic and 50% in Poland and Slovakia, and these decreases can be accounted for by the closure of borders alongside a loss of income for many. Consequently, this had a strong impact on the financial income of companies in the sector, even though the impact was minor in macroeconomic terms given the small size of the sector in relation to the economy – 2.8% of GDP in the Czech Republic, 2.6% in Slovakia and 1.2% in Poland (OECD figures for 2018, 2017 and 2015).

Another sector severely hit was Transport and Logistics. In Germany, air transportation suffered a loss of sales equal to 45% last year. The water transportation sector, key for moving goods from the German industrial area, was also affected, reporting a drop of about 17% nationally last year. However, the impact witnessed in these two areas was less severe in the three other countries, although land transportation (road and rail) seems to have been affected equally in all four countries, with a drop between 6% and 10% in real sales. It is worth noting the difference in terms of transported products, with trade in pharma and ICT products having remained stable throughout last year. With regard to the positive impact that an expansion in e-commerce could have brought, it seems that the sector has not benefitted specifically, as this would have required a change of fleet for most companies.

Ultimately, the pharmaceutical sector seems to have shown the best performance in all four countries observed. Furthermore, domestic production in all four countries increased, which makes sense as the global health crisis increases the demand for medicine.

What should we expect from these sectors in 2021?

All sectors should see growth in 2021, given the low levels reached in 2020. Unsurprisingly, the automotive sector is expected to be the best performer of 2021 in Germany, the Czech Republic, Poland and Slovakia, given its very low starting point. However, it will most likely take several years – at least in the Czech Republic, Poland and Slovakia – to reach pre-crisis production levels. Currently, the biggest risk to the outlook for the automotive sector is the difficulty of supplying semiconductors, a challenge on a global scale that is slowing production or even temporarily immobilising it in some countries. This is a source of concern given the importance of the automotive sector to the economies of the Czech Republic, Poland and Slovakia.

Tourism, transport, and machinery and equipment should also bounce back significantly in these countries. That said, the fortunes of the tourism sector depend largely on the evolution of the vaccination rollout programme and the pandemic itself. Any further delays in the EU vaccination programme will inevitably delay the reopening of the economy, and thus have an impact on tourism. Given its relative success in 2020, annual growth for the pharmaceutical sector should be low in 2021, and could even turn negative.

What are the main risks to the outlook for these sectors?

The automotive sector faces several risks. The first of these is Brexit, because although it has already occurred, signs of its impact are still in the early stages. That is to say, supply chains are not yet established given all the red tape and other procedures that must be fulfilled to allow for the smooth flow of trade between the blocks. The second risk is CO2 emissions targets, which put additional pressure on car manufacturers in Europe and which should require significant financial resources. The third risk – connected to the previous point – is the end of the internal combustion engine automobile and the rise of electrical vehicles sales, leading to high investments. And last but not least, is the current disruption to the supply chain of semiconductors, which poses a significant downside risk to global production in the first half of 2021.

The main risk for the pharmaceutical sector would be that politicians, after having had a growing influence on this sector during the crisis, continue in this way, by trying to influence prices, for example. In addition, austerity programmes – which are highly likely after a crisis – could also lead to government cuts in the healthcare sector and in the reimbursement of medicines in certain countries. Moreover, nationalist policies are also a rising threat for the sector.

Another element that may put the short-term outlook at risk is the evolution of vaccination campaigns in Europe. While the rollout in Europe has fallen behind, delaying the return to normal by as much time as this takes to resolve, the emergence of certain variants could prolong the duration of the pandemic, reduce the efficacy of vaccines and thus deepen the impact of the virus on economic activity. This would greatly affect the tourism sector, which is unlikely to reach pre-pandemic levels before 2023 at the earliest, and also, indirectly, the hospitality sector (hotels, restaurants, etc.).

One consequence of delaying the vaccine rollout is that the economic recovery might be weaker than currently projected, further jobs may be lost and more companies might default. It should be highlighted that, to date, a large wave of defaults has been avoided thanks to the substantial support measures provided by the authorities (estimated at 27.8% of GDP in Germany, 5.4% in Poland, 4.4% in Slovakia and 15.4% in the Czech Republic according to the IMF in April 2021).

Analyst: Matthieu Depreter – m.depreter@credendo.com

In the framework of its regular review of short-term (ST) political risk classifications, Credendo has upgraded 3 countries (Azerbaijan, Eswatini and Mauritania) and downgraded 4 countries (Anguilla, Montserrat, Saint Kitts and Nevis and Sri Lanka).

Azerbaijan: upgrade from 4/7 to 3/7

Last year, Credendo downgraded the short-term political risk classification of Azerbaijan to category 4/7 (from 3/7) amid a sharp deterioration of the situation in Nagorno-Karabakh. The tension escalated into an open and armed conflict of 6 weeks that ended with the signature of a ceasefire agreement on 9 November 2020. The Russian-brokered agreement confirms the military victory of Azerbaijan. Indeed, according to the agreement, the part of Nagorno-Karabakh seized by Azerbaijan during the conflict remains under its control. Moreover, Azerbaijan regains the control of seven territories surrounding Nagorno-Karabakh that were previously controlled by Armenia. As no major confrontations have been witnessed since the signature of the ceasefire agreement and as Azerbaijan’s liquidity remains good, Credendo decided to upgrade the country’s short-term political risk classification to category 3/7, its pre-conflict level.

Mauritania: upgrade from 5/7 to 4/7

The Covid-19 pandemic has had a significant impact on Mauritania, leading to a 2% economic contraction in 2020 and significant financing needs. International support and debt service suspension provided fiscal space for emergency spending. Yet, over the course of the year, a jump in commodity exports unexpectedly resulted in a 2020 fiscal surplus. Strong gold prices and the sharp recovery in iron ore prices since mid-2020, led to a jump in export revenues. Consequently, foreign exchange reserves levels increased up to USD 1.5 billion (4.8 months of import cover) by December 2020, a record high. These benefits are set to support the 2021-2022 recovery, with real GDP growth expectations at 3.1% and 5.6% respectively. However, the volatile nature of commodity markets is an important vulnerability and risk to the country’s projections. With liquidity indicators at record levels, Credendo decided to upgrade Mauritania’s short-term political risk classification from 5/7 to 4/7.

Sri Lanka: downgrade from 5/7 to 6/7

The economy has been hit hard by the Covid-19 pandemic, particularly through the weak external demand, tourism freeze and contracting workers’ remittances. As a result, the current account deficit widened in 2020, thereby raising external financing needs. The situation is made more difficult by depreciating pressures on the rupee – slowed down by Central Bank’s interventions – and challenging debt servicing with probably no market access this year. Even though China (and to a lesser extent India) is coming to Sri Lanka’s financing rescue and some debt restructuring continues to be discussed with Beijing, the latest developments show that foreign exchange reserves might remain under pressure in the coming months amid a prolonged Covid-19 impact and high external debt repayments. Hence, with foreign exchange reserves covering about 2 months of imports in January and a fragile recovery expected in the coming months, Credendo decided to downgrade the country’s short-term political risk classification to 6/7.